When did we start thinking of homes as investments?

Last updated on: April 1, 2014 at 9:33 am by Jane the Actuary

When did we start thinking of homes as investments? 2014-04-01T09:33:00-06:00 Jane the Actuary

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This was something I was thinking about the other day (another topic that I don’t really have the ability to research, sadly): at some point, we lost our way with respect to the way we think about housing. We (that is, the Experts) all cheer when home prices go up, and tell us that for most Americans, the equity in their homes is the lion’s share of their wealth (or is it the value of the home, without regard to equity vs. mortgaged amount?), so it’s good, good, good when home prices go up.

But homes are not the same as stocks or other investments. If the stock market is galloping along, say, at 10% appreciation a year, and I, as a newly minted Adult, want to start investing, I haven’t really lost anything or suffered any harm if I can only buy 10 shares of Google rather than the 100 my father could for the same cost. But if I venture into the housing market and can only buy 100 square feet for the same price as my parents paid for 1000 square feet, this is a Bad Thing Indeed.

Let’s change our terminology and say that, instead of home price appreciation, we’re looking at “housing inflation” when prices gallop upwards, and “increased housing affordability” when they dip downwards.

Now, my husband and I didn’t suffer from the market crash. How much our home is worth relative to what we paid is hard to say, because we put an addition on (well aware that it cost more than the increase in home value, but if you factor in the costs of moving — the movers themselves, the real estate agent’s commission, the remodeling on the new home, etc. — it was much closer to a wash anyway) in the meantime, but we bought before the peak and the Chicago area was never as badly overheated as other areas of the country anyway. But my sister — she’s considerably underwater because her part of the country tanked and because she did buy into the “buy as much house as you can qualify for because prices will only go up” mantra.

Interestingly, in Germany, houses are regarded much more as an investment, with individual investors renting out properties much more common than apartment complexes owned by corporations. And, even though I said in an earlier post that it’s much more common in Germany for families to live in condos rather than the near-requirement to live in a single-family home, at the same time, it’s also a fairly normal thing for those single-family and duplex homes which do exist to be rented out. (And, as a commenter pointed out, it’s much more the norm for a renter to live in a place long-term, and to remodel the kitchen themselves, packing it up upon leaving or even selling it to the next tenant.)

In The Netherlands, there’s an even more interesting approach: if you own a house, you pay tax on the “deemed rental value” (eigenwoningforfait) of the house. The idea is that if I own a house whose rental value is determined to be $20,000 a year, then it’s as if I’m renting the house to myself and earn a notional income of that amount, on which I am taxed, though I think that, in practice, the tax is applied as a flat percentage of the home’s value and isn’t that different from a property tax, which only modestly offsets the deductability of mortgage interest.

But wait — wasn’t I saying that it’s not a good thing to look at houses as investments? I suppose the difference is that, if you coldly look at real estate as an investment, which you may or may not choose to live in, then your approach to home-buying (and the government and policy experts’ approach to home-buying trends) is different than in a situation in which we simultaneously promote home ownership at all costs, and home price appreciation at the same time. Besides which, we understand that investments have risks — stock prices can drop, bond rates can go up or down or lose their value entirely, if a company goes bankrupt, and venture capitalists can lose money as fast as they can make it. But the government and policymakers seem determined to return us to a time when home prices go up, up, up without end.

And — back to my original question — I’d be interested in knowing when this shift happened, when we adopted the mindset we have now. In the post-war housing boom, for instance, how did home prices and mortgage payments look relative to income? After all, Levittown houses were small. Was this because the buyers just didn’t dream of anything larger? Because they were overstretched as it was? Or because they would never dream of going into debt as much as they possibly could?

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